Market Plus: Sep 26, 2003

posted on September 26, 2003

Pearson: Welcome to the Market Plus segment of our Market to Market Web page. If you enjoy our site, make sure you tell your friends and neighbors. We'd love to have them join us here too. And if you especially enjoy our commentary from our analysts, tell them as well. This week, Alan Brugler, one of our new market analysts is with us, he's doing a great job. We want to have him talk a little bit more about this bean market. And, Alan, you talked about it, I mean, this bean market is kind of a crapshoot, you've got some areas, early on as you mentioned in the show, that are reporting some disastrously low yields. You also point out that some better yields will be coming, the early stuff is generally where we get the poor yields. But as you look across the board you start penciling in some different numbers, what could happen in this bean market. These boys in Brazil have to be watching all this with a great deal of interest.

Brugler:Yeah, they're watching it, they're looking to expand their production where they can. Now, of course, they had some Asian rust issues and some fungus issues and we're looking to kind of break up that monoculture a little bit and go back away from beans, which our bean producers would have loved to see.

Pearson: Yeah.

Brugler: But our bean producers are also enjoying having six dollar and twenty-three cent average cash price, that's US average this week, soybean prices. That's the highest cash price at harvest that we've had since 1997. And a lot of our producers who don't store the beans who like to sell them straight out of the field are just smiling all the way to the elevator. But, again, the downside is we probably are signaling to South America that they ought to ramp up production a little further if they can to kind of make up for our shortfall. We're also signaling some of the end users that they shouldn't expand there crush plants, you know, they should no go a lot further on the usage side because we don't have the supply to meet that demand. But, until then, if we're going to experience those low yields across the whole Corn Belt or Midwest, then we probably do have to get prices higher to ration that demand. It would be very easy to get beans up to seven dollars or seven fifteen technically. There are several chart points up around that area if we can get past the sixty area that we're currently in. So, you know, fundamentally it's a very tight squeeze. The market will eventually want to respect that South American crop but most likely after a lot of it is committed to the ground.

Pearson: You bet, you bet. So, we're still early, of course, for what's going on down there but you're right, we're giving them a big cue to keep the planters moving down in that part of the world. Let's go over, so beans are one that you would hang onto at this stage of the game?

Brugler: Right now I'd hang onto them but I'm aware of the fact that we're high, historically speaking, as I said, high since '97 on the cash side and I think we've got to not get, you know, don't get nine dollar beans in your head and just determine you're going to lock them away until they get there, that may not happen.

Pearson: Good point, let's be business like here. Now, what's up with this fed cattle market? You said, we're getting into dangerous ground here. We have the greatest risk when prices are the highest. In the cattle industry, we haven't had high prices in a long time, we've got record prices now on fed cattle, record prices on feeders. You talked about feeders and trying to make them work right now which is darn tough. Fed cattle producers, people that put cattle on feed here in the last four to six weeks, maybe that aren't hedged, what do you tell them?

Brugler: I think you've got to put a floor under them. You've got to recognize that even though the back months are at a discount to the front and they don't look like a very good hedging opportunity, there's kind of a recency effect which is a psychological term. You know, you burn your hand, you stay away from the stove for a while. In cattle market terms, when the front month goes down we're going to tend to project that to the back months. And even though they're discounted they'll still go down some. So, I think you have to have some hedge protection on, you can maybe, if you do that with puts, you can maybe enhance that position by selling some calls above the market knowing that this multi-year high is probably in price. I'm not comfortable selling those calls yet, I'm more inclined to do put spreads right now. I like options because I control the risk a little closer if funds come in and buy a bunch of contract, I'm not going to get a huge margin call on my cattle which a number of people have had that experience in the last six months, it's a good problem if you've got all the cattle out in the lot. But most of us would rather have that brokerage account paying us rather than the other way around.

Pearson: Absolutely, good point. Alan, as usual, some great insights. Alan Brugler, joining us here on the Market Plus segment of our Market to Market web page.

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